|
"Silver: $18/oz And Going To $50? Very Possible! The price of silver has tripled in price since 2003 and rose 47% in 2007. Because of huge industrial demand and silver ETFs, some analysts believe silver will surpass its all time high of $50/oz. Find out more."
The above paragraph is one of many compelling advertisements and promotions I've seen a lot of lately to motivate investors to buy silver. Gold bugs are often not as enthusiastic about the "poor man's gold" as silver has often been called. That may be changing as new information about the many applications and increasing demand for silver is creating a new mystique about this potential wealth-preserving investment. Investors in developing nations like Brazil, China, India and even Russia are trying to protect their purchasing power by regularly putting some of their family's savings into silver. Recently I read an informative, brief analysis of why silver has some "catching up" to do with its big cousin, gold. Ian Davis, a writer with Stansberry & Associates (www.StansberryResearch.com) makes some compelling points as to why silver will most likely surprise a number of hard asset investors who think gold is the best precious metals investment . Here's what Mr. Davis wrote on July 15, 2008, and for me it makes me glad I own Silver Wheaton (NYSE:SLW), Pan American Silver (Nasdaq:PAAS), Silver Standard Resources (Nasdaq:SSRI) and Hecla Mining (NYSE:HL). "Would you be disappointed with a seven-year gain of 710%? Well, what if you found out a similar investment would have returned 1,481%? If you had bought gold in 1973, this is the exact situation you would have faced in 1980. Between 1973 and 1980, the price of gold went up 710%. As for the 1,481% gain... that came from silver. You see, the late 1970s were a period of rampant inflation. The Consumer Price Index (CPI), a common measure of inflation, rose an average 8.2% per year over the seven-year period. Over the last 60 years, the normal rate of inflation has been only 3.8% annually. And right now, I think we've got a similar setup... Inflation in the U.S. is soaring once again. So far this year, we're on track for a 4.1% increase in the CPI... And it's going to continue to get worse. High commodity prices are trickling down, forcing manufacturers to raise their prices. In the face of this rampant inflation, Americans will abandon the dollar and turn to their old friends, gold and silver. For almost as long as civilization has existed, gold and silver have dominated the currency markets. In fact, before 1900, the U.S. dollar was pegged to both gold and silver. Back then, one ounce of gold was worth $20.65, and an ounce of silver was worth $1.29. Today, almost all currencies are "fiat" currencies (meaning they are not linked to any underlying asset). However, central banks still hold large amounts of gold as a store of value. The U.S. central bank, for example, holds 78.2% of its reserves in gold. So gold is still being treated as money... at least by central banks. Silver, on the other hand, is not. Just look at the ratio between the prices of gold and silver, which Porter has covered before. When both metals are being used as currency, the ratio of their prices is about 16. Meaning gold is 16 times as expensive as silver. This was true for hundreds of years leading up to 1900, after which many countries abandoned their silver pegs. Because central banks and citizens abandoned their silver, since 1900, the price of gold has been, on average, 52 times the price of silver. All the silver being produced was funneled into jewelry and industrial uses. And it more than met silver demand. Prices fell. So why did silver outperform gold in the late 1970s? With the rise of inflation, investors lost faith in the U.S. dollar. They then turned to gold and silver as alternative ways to hold money. Once again, silver became a currency... And the ratio between gold and silver (which had soared above 32) returned to around 16. The following chart shows the ratio of gold to silver going all the way back to 1832. 
As you can see, silver appreciates versus gold every time the U.S. goes through a monetary crisis. When gold and silver are both considered currencies, the ratio of their prices returns to around 16. But why 16? If demand for gold and silver were identical, and we mined silver at 16 times the rate we mined gold, then a ratio of 16 would make sense. But gold isn't 16 times as scarce as silver. According to the U.S. geological survey, we only mined 8.2 times as much silver as gold last year. This makes the high premium that gold demands even more unusual... So it must be demand. Demand is currently higher for gold because it is already considered a store of wealth. Central banks use large quantities of gold to back their reserves. Demand for gold shouldn't change much. But the demand for silver will increase as investors begin to use it as another way to diversify out of the dollar. This is what will bring down the ratio. And demand for silver is already on its way up. The ratio has already fallen from 81.4, its peak reached in 2003. Inflation is climbing, just like it did in 1973... And silver is starting to become a legitimate alternative to holding U.S. dollars. So I believe the current ratio of 53.7 will fall even farther. And history shows it should fall to around 16. In order for the ratio to reach 16, silver would need to rise by 235.6%. Sounds like a good investment to me. If you want to invest in silver, you can buy a silver ETF, iShares Silver Trust (SLV). Silver is much more volatile than gold, so be careful with your position size... And don't be scared off if silver corrects." We sincerely thank Stansberry & Associates for allowing us to share this with you. I whole-heartedly suggest you go to www.StansberryResearch.com and sign up for their free daily e-letter, The S&A Digest, where you will read comments from some outstanding newsletter writers like Dan Ferris and Porter Stansberry. Of course you can buy silver, you know, the real deal, the physical asset itself. It might be hard to find American Silver Eagles or the Canadian Silver Maple Leafs. These one ounce silver coins are becoming scarce. If you can find them they are selling with an expensive premium. You might call your favorite dealer and ask about the 10-ounce silver bars. I'm told they are more readily available, and the premium is modest and more reasonable. If you have some suggestions on how to invest wisely in silver, please leave your comments, which are always appreciated.
|
Money Rumor Mill 
Subscribe to this comment's feed